“Having corporate status implies credit worthiness, reliability, and longevity.”
In this day and age, when technology and information are readily available and accessible, the prospect of running a home-based business is well within reach. A growing number of small businesses are opening every day, and many of the people running them are deciding to operate out of their homes. You may be doing just fine as a sole proprietor, but incorporating your business offers advantages and protections which you may not even know are available to you. With the proper guidance, becoming a corporate entity can open the door to a new level of success and allow you to expand farther than you previously could.
A Corporation Protects You from Personal Liability
A “corporation”, as defined by Merriam Webster, is “a body formed and authorized by law to act as a single person”. No matter what sort of business you are running, this is one of the most compelling reasons that you should consider incorporating. The law views a corporation, or “C corporation” as a person with its own rights and obligations, an independent entity that exists and moves separately from you, the individual. Its legal designation offers benefits which a sole proprietor could never access without this official stamp. For example, if an independent suffers a sudden profit loss, all responsibility will fall on the individual, possibly crippling your business or even affecting your personal credit. As a corporation, all gains, losses, and debts are attributed to the corporate body because remember: In the eyes of the law, this separate body incurs all penalties and successes, alike, interceding for you and protecting the assets of you and your partners.
Turn Your Business into a Serious Company
In the same way that a married person is viewed as more responsible and reliable than a single person, an incorporated business is regarded by the public, as well as potential investors, as far more stable than the same business operating “under the table”, so to speak. Having corporate status implies credit worthiness, reliability, and longevity. This stands to reason because when you incorporate, you remove all doubt that your company is no longer simply filling orders as they come—you are now prepared to take on larger business and to play in the major league. Imagine yourself attending a high-powered business meeting. You wear a suit, you do your homework, you show up early, and you bring trusted partners who will back you up. The same principle applies to forming your business because the operative word is stability, and projecting this kind of image becomes especially important when you begin looking for investment capital.
Attract Larger Investors
Acquiring capital for your business is obviously crucial, and attempting to do this as a sole proprietorship is difficult because large investors want to be sure of a few things, before they will bring their money to the table. As stated above, corporate status defines you as a reliable company, which is one of the criteria that a lender or venture capitalist will be looking for. The thing to remember is that the relationship between you and a potential investor is based on trust, as well as the assurance of a return on investment. Being a corporation communicates to others that if you are able to exist and operate on this level, then the company already has an at least relatively significant net worth. With this status, investors will also know that the business will not disintegrate if a principal contributor decides to leave because a corporation has an unlimited life; it has the ability to continue even if the original owner leaves the company.
Corporations Appeal to Better Employees
Beyond investors, corporate status also attracts motivated, more qualified employees to join in with you. Independent contractors cannot offer the competitive benefits or even profit sharing that a corporation can, which makes quality employees more likely to join a corporate group of professionals than a basically informal small business. Stock options for employees is a benefit afforded only by a corporation, and the best of the people seeking a position in your field want to be sure that their future is somewhat secure. Without a world class staff, you can never have a world class company.
Tax Advantages for S Corporations
The S Corporation gets its name from a special provision made by the IRS, called Subchapter S. This designation is favorable because it retains the liability protection of a corporation, while additionally allowing your business to avoid double taxation. Double taxation, which is a disadvantage of a C Corp, occurs when the profits of your company are taxed on the front end, and again when the company pays out dividends to shareholders. When you form an S Corporation, or S Corp, for short, only shareholders are taxed, “passing-through” to each individual’s personal tax return; the corporate body, itself, is not taxed. The federal government grants this status to qualifying small businesses who meet certain requirements, and you or your attorney will discover whether or not you are eligible when you file. There is always the option of starting a Limited Liability Company (LLC), which has its own advantages and drawbacks. An LLC may file for S Corp status, allowing you to combine the simplified structure of an LLC with the tax treatment of an S Corp. There is a downside associated with an LLC, in that, unless you include a provision in your operating agreement, it dissolves when a member leaves the company.
Though opting to become a corporation entitles your business to valuable advantages over a sole proprietorship, the experience of forming it can be complicated and time-consuming. You may vote to do everything on your own, but building a corporate structure, filing for licenses and permits, and completing all the necessary underwriting is almost sure to compromise your focus as you struggle to run your business at the same time. For precisely this reason, there are organizations that exist for the sole purpose of guiding you through the process to make it as painless as possible. Talkroute is proud to partner with Rocket Lawyer, a group of quality professionals who provide affordable legal services and take the guesswork out of incorporating your business. An experienced and highly qualified staff will help you incorporate your business, step by step. Through their service, you can obtain legal advice, furnish all necessary documents and forms, and incorporate within minutes. When you are ready to form your new corporation, Rocket Lawyer is only a click away.
Stephanie is the Marketing Director at Talkroute and has been featured in Forbes, Inc, and Entrepreneur as a leading authority on business and telecommunications.
Stephanie is also the chief editor and contributing author for the Talkroute blog helping more than 100k entrepreneurs to start, run, and grow their businesses.